BNY Mellon to record $850M expense in wake of U.S. Tax Court ruling

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Bank of New York Mellon Corp. will take an $850 million charge this quarter to cover foreign tax credits that the Internal Revenue Service successfully challenged, a financial blow that could result in its first quarterly loss in almost four years.

BNY Mellon, the nation's largest custody bank, was one of several financial institutions that ran into trouble with the IRS for claiming tax credits on complex financial transactions going back several years. The U.S. Tax Court ruled Monday that the corporation was not entitled to credits that it claimed in 2001 and 2002.

The tax dispute is the latest problem confronting the bank, which provides services for wealthy investors. BNY Mellon continues to face lawsuits in several states that were brought in 2011 involving its foreign currency exchange business.

In siding with the IRS, the Tax Court ruled that the credits, which amounted to $199 million, “lacked economic substance.”

BNY Mellon said in a statement that it disagreed with the decision and planned to appeal. At the same time, it disclosed that it will take an $850 million after-tax charge in the January-March quarter because of the ruling. A BNY Mellon spokesman refused to comment beyond the statement.

Analysts said they expected the financial institution to post a loss in the first quarter because of the charge. It would be the first quarterly loss since BNY Mellon lost $2.46 billion in the July-September 2009 quarter following huge securities losses during the peak of the financial crisis.

“This is a hit to their earnings, but the company will overcome it,” said Gerard Cassidy, an analyst at RBC Capital Markets in Portland, Maine.

Standard & Poor's, a Wall Street credit rating agency, said that it expects BNY Mellon to report a “moderate loss” in the first quarter, but “generate good profits for full-year 2013.” Jeff Harte, an analyst at Sandler O'Neill & Partners in Chicago, said he expects the loss will reduce earnings by about 72 cents a share.

Wall Street was expecting BNY Mellon to post earnings excluding one-time charges and gains of 52 cents a share this quarter. So, the charge would yield a loss of about 20 cents a share. The New York-based bank, which employs 7,600 in Pittsburgh, earned $619 million in the first quarter a year ago.

“You clearly don't like to see something like this, but the stock wasn't off much today,” Harte said.

Shares of BNY Mellon closed down 3 cents at $27.90.

BNY Mellon provides administrative services for $26.7 trillion in investments and manages about $1.4 trillion in investments. It faces lawsuits in several states that allege BNY Mellon for 10 years traded foreign currency for clients at one price and charged them a different price based on daily highs and lows. The bank denies those claims. The lawsuits seek $2 billion.

BNY Mellon is not the only bank to be scrutinized for using foreign tax credits. The IRS challenged six banks' tax bills over tax-advantaged transactions totaling about $2 billion, according to ProPublica.

An IRS spokesman declined to comment.

“I wouldn't be surprised if there's a potential for more of these” with other banks, Harte said.

The BNY Mellon foreign tax credits that the IRS disallowed were part of a transaction arranged by London-based Barclays Bank plc and KPMG.

BNY Mellon spokesman Kevin Heine said in a statement that the bank believes the tax treatment behind the transactions “was consistent with statutory and judicial authority existing at the time.”

The ruling is getting the attention of other banks. BB&T Corp., a large bank based in Winston-Salem, N.C., will “take some time to digest” the BNY Mellon decision's possible effect on its appeal of a similar tax decision, said spokesman David White. BB&T had paid $892 million in taxes, penalties and interest to the IRS in 2010 before appealing.

Thomas Olson is a staff writer for Trib Total Media. He can be reached a 412-320-7854 or at tolson@tribweb.com.

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